Cardiff Lexington Corp 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following management’s discussion and analysis of financial condition and results of operations provides information that management believes is relevant to an assessment and understanding of our plans and financial condition . The following financial information is derived from our financial statements and should be read in conjunction with such financial statements and notes thereto set forth elsewhere herein. Use of Terms Except as otherwise indicated by the context and for the purposes of this report only, references in this report to “we,” “us,” “our” and “our company” are to Cardiff Lexington Corporation, a Nevada corporation, and its consolidated subsidiaries. Special Note Regarding Forward-Looking Statements This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than statements of historical facts are forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about: · our ability to successfully identify and acquire additional businesses; · our ability to effectively integrate and operate the businesses that we acquire; · our expectations around the performance of our current businesses; · our ability to maintain our business model and improve our capital efficiency; · our ability to effectively manage the growth of our business; · our ability to maintain profitability; · the competitive environment in which our businesses operate; · trends in the industries in which our businesses operate; · the regulatory environment in which our businesses operate under; · changes in general economic or business conditions or economic or demographic trends in the United States, including changes in interest rates and inflation; · our ability to service and comply with the terms of indebtedness; · our ability to retain or replace qualified employees of our businesses; · labor disputes, strikes or other employee disputes or grievances; · casualties, condemnation or catastrophic failures with respect to any of our business’ facilities; · costs and effects of legal and administrative proceedings, settlements, investigations and claims; and · extraordinary or force majeure events affecting the business or operations of our businesses. In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2025, or the Form 10-K. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. 35 In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. The forward-looking statements made in this report relate only to events or information as of the date on which the statements are made in this report. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason. Overview Our company is a targeted healthcare holding company dedicated to acquiring and building middle-market niche healthcare clinics, primarily in orthopedics, spine care, and pain management. Our partnership-driven culture emphasizes service excellence, teamwork, accountability, and performance. We are focused on the acquisition of orthopedic and related modality practices with strong organic growth plans that are materially cash generative to maximize value and providing greater coverage for our patients, and diversification and risk mitigation for our stockholders. All current revenue is derived from Nova Ortho and Spine, LLC, or Nova,, which was acquired on May 31, 2021. It operates a group of regional primary specialty and ancillary care facilities across Florida and Georgia that provide traumatic injury victims with primary care evaluations, interventional pain management, and specialty consultation services, including emergency medical condition assessments. We currently primarily focus on plaintiff-related care and provide healthcare to uninsured patients. Our patients have typically been in an accident and have filed a lawsuit as a plaintiff against the defendant who is allegedly responsible for the accident as the result of negligence or another tort. We provide a full range of diagnostic and surgical services for injuries and disorders of the skeletal system and associated bones, joints, tendons, muscles, ligaments, and nerves. From sports injuries, to sprains, strains, and fractures, our doctors are dedicated to helping patients return to active lifestyles. We also own a real estate company, Edge View Properties, Inc., or Edge View, which we acquired on July 16, 2014. Edge View owns five (5) acres zoned medium density residential (MDR) with 12 lots already platted, six (6) acres zoned high-density residential (HDR) that can be platted in various configurations to meet current housing needs, and twelve (12) acres zoned in Lemhi County as Agriculture that is available for further annexation into the City of Salmon for development, as well as a common area for landowners to view wildlife, provide access to the Salmon River and fishing in a two (2) acre pond. Management does not currently have any plans to develop this property and expects to eventually sell the property. All of our operations are conducted through, and our income derived from, our two subsidiaries. Recent Developments Convertible Promissory Note On April 8, 2026, we entered into a securities purchase agreement with an accredited investor, pursuant to which we issued to such investor a convertible promissory note in the principal amount of $268,889 with a $26,889 original issuance discount, $5,000 in associated legal fees and $7,000 for due diligence costs, for total proceeds of $230,000. This convertible promissory note carries a one-time interest charge of $32,267 (rate of twelve percent (12%)) which is guaranteed at issuance. This note matures on April 8, 2027. The note may be converted at any time after issuance at a variable conversion price equal to 60% of the lowest trading price of our common stock over the ten trading days prior to the conversion date. The note also contains an ownership limitation, which provide that we shall not effect any conversion, and a holder shall not have the right to convert, to the extent that after giving effect to the issuance of common stock upon such conversion such holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of common stock upon such conversion. 36 Segments As of March 31, 2026, we had two reportable operating segments as determined by management using the “management approach” as defined by the authoritative guidance on Disclosures about Segments of an Enterprise and Related Information . (1) Healthcare (Nova) (2) Real Estate (Edge View) These segments are a result of differences in the nature of the products and services sold. Corporate administration costs, which include, but are not limited to, general accounting, human resources, legal and credit and collections, are partially allocated to the two operating segments. The healthcare segment provides a full range of diagnostic and surgical services for injuries and disorders of the skeletal system and associated bones, joints, tendons, muscles, ligaments, and nerves. The real estate segment consists of Edge View, a real estate company that owns five (5) acres zoned medium density residential (MDR) with 12 lots already platted, six (6) acres zoned high-density residential (HDR) that can be platted in various configurations to meet current housing needs, and twelve (12) acres zoned in Lemhi County as Agriculture that is available for further annexation into the City of Salmon for development, as well as a common area for landowners to view wildlife, provide access to the Salmon River and fishing in a two (2) acre pond. Management uses revenues, cost of sales, operating expenses, and income (loss) before taxes to evaluate and measure its subsidiaries’ success. To help the segments achieve optimal operating performance, management retains the prior owners of the subsidiaries and allows them to do what they do best, which is run the business. Additionally, management monitors key metrics primarily revenues and income from operations in order to allocate resources accordingly. Results of Operations Comparison of Three Months Ended March 31, 2026 and 2025 The following table sets forth key components of our results of operations during the three months ended March 31, 2026 and 2025, both in dollars and as a percentage of our revenue. Three Months Ended March 31, 2026 2025 Amount % of Revenue Amount % of Revenue Total revenue $ 2,222,280 100.00% $ 2,915,567 100.00% Total cost of sales 904,225 40.69% 1,075,034 36.87% Gross profit 1,318,055 59.31% 1,840,533 63.13% Operating expenses Depreciation expense 593 0.03% 3,365 0.12% Loss on disposal of fixed assets – – 12,593 0.43% Share based compensation 664,196 29.89% – – Selling, general and administrative 1,164,425 52.40% 1,280,641 43.92% Total operating expenses 1,829,214 82.31% 1,296,599 44.47% (Loss) income from operations (511,159 ) (23.00% ) 543,934 18.66% Other (expense) income Other income (expense) 10,081 0.45% (1,597 ) (0.05% ) Derivative liability loss on issuance and changes in fair value (668,821 ) (30.10% ) – – Interest expense (1,910,737 ) (85.98% ) (993,114 ) (34.06% ) Amortization of debt discounts (11,438 ) (0.51% ) – – Total other expense (2,580,915 ) (116.14% ) (994,711 ) (34.12% ) Net loss $ (3,092,074 ) (139.14% ) $ (450,777 ) (15.46% ) 37 Revenue . For the three months ended March 31, 2026 and 2025 all our revenue was generated by our healthcare segment, which generates revenue through a full range of diagnostic and surgical services. Our total revenue decreased by $693,287, or 23.78%, to $2,222,280 for the three months ended March 31, 2026 from $2,915,567 for the three months ended March 31, 2025. The decrease in revenue is mainly attributable to a decrease in surgical procedures services in the first quarter of 2026 from the first quarter of 2025 and due to the decrease in the realization rate to 41% in the first quarter of 2026 from 44% the first quarter of 2025. Cost of sales . Our cost of sales consists of surgical center and laboratory fees, physician and professional fees, salaries and wages and medical supplies. Our total cost of sales decreased by $170,809, or 15.89%, to $904,225 for the three months ended March 31, 2026 from $1,075,034 for the three months ended March 31, 2025. As a percentage of revenue, cost of sales increased from 36.87% for the three months ended March 31, 2025 to 40.69% for the three months ended March 31, 2026. The increase is attributable to a decrease in revenue as noted above, a decrease in personnel related expenses and a decrease in laboratory fees. Gross profit . As a result of the foregoing, our total gross profit decreased by $522,478, or 28.39%, to $1,318,055 for the three months ended March 31, 2026 from $1,840,533 for the three months ended March 31, 2025. Our total gross margin (as a percentage of revenue) decreased from 63.13% for the three months ended March 31, 2025 to 59.31% for the three months ended March 31, 2026. Depreciation expense . Our depreciation expense was $593, or 0.03% of revenue, for the three months ended March 31, 2026, as compared to $3,365, or 0.12% of revenue, for the three months ended March 31, 2025. Loss on disposal of fixed assets . For the three months ended March 31, 2025, we recognized a loss on disposal of fixed assets of $12,593, which resulted from the identification of certain medical equipment that was no longer functional in our medical facilities. Share based compensation expense . Share based compensation expense was $664,196 and $0 for the three months March 31, 2026 and 2025, respectively. Share based compensation expense in 2026 consisted of expense related to the issuance of common stock to our board of directors, officers and employees, our investor relations firm and other consultants for services provided. Selling, general and administrative expenses . Our selling, general and administrative expenses consist primarily of accounting, auditing, legal and public reporting expenses, personnel expenses, including employee salaries and bonuses plus related payroll taxes, advertising expenses, professional advisor fees, credit losses, rent expense, insurance and other expenses incurred in connection with general operations. Our selling, general and administrative expenses decreased by $116,216, or 9.07%, to $1,164,425 for the three months ended March 31, 2026 from $1,280,641 for the three months ended March 31, 2025. As a percentage of revenue, our selling, general and administrative expenses were 52.40% and 43.92% for the three months ended March 31, 2026 and 2025, respectively. The decrease in selling, general and administrative expenses was primarily attributable to lower billing costs, rent expense and travel expenses. Additional there were no credit losses recorded for the three months ended March 31, 2026. These decreases were partially offset by an increase in professional fees. Total other (expense) income . We had $2,580,915 in total other expense, net, for the three months ended March 31, 2026, as compared to $994,711 in total other expense, net, for the three months ended March 31, 2025. Total other expense, net, for the three months ended March 31, 2026 consisted of interest expense of $1,910,737, a $668,821 loss from issuance or change in fair value of the derivative liability, and amortization of debt discounts of $11,438. These expenses were offset slightly by other income of $10,081 from the return of funds related to a fraudulent bank transaction. Other expense, net, for the three months ended March 31, 2025 consisted of interest expense of $993,114 and other expense of $1,597. The increase in interest expense is primarily attributable to the increase in initial and incremental fees charged on the number of existing purchases and claims under the line of credit described below. We recorded a loss on issuance of derivative liability of $1,192,640 related to the bifurcation of conversion options in several convertible notes issued during the first quarter of 2026. This was offset by a $523,819 gain on the revaluation of the derivative liability as of March 31, 2026 for the change in fair value of the derivative liability. The derivative liability is remeasured at fair value each reporting period using a Monte Carlo simulation model. Changes in assumptions, as well as changes in our stock price during the period, resulted in a decrease in the estimated fair value of the derivative liability and the corresponding loss. 38 Net loss . As a result of the cumulative effect of the factors described above, our net loss was $3,092,074 for the three months ended March 31, 2026, as compared to $450,777 for the three months ended March 31, 2025, an increase in loss of $2,641,297, or 585.94%. Liquidity and Capital Resources As of March 31, 2026, we had $683,507 in cash. To date, we have financed our operations primarily through revenue generated from operations, sales of securities, advances from stockholders and third-party and related party debt. We believe, based on our operating plan, that current working capital and current and expected additional financing should be sufficient to fund operations and satisfy our obligations as they come due for at least one year from the financial statement issuance date. However, additional funds from new financing and/or future equity raises are required for continued operations and to execute our business plan and our strategy of acquiring additional businesses. The funds required to sustain operations range between $600,000 to $1 million and additional funds execute our business plan will depend on the size, capital structure and purchase price consideration that the seller of a target business deems acceptable in a given transaction. The amount of funds needed to execute our business plan also depends on what portion of the purchase price of a target business the seller of that business is willing to take in the form of seller notes or our equity or equity in one of our subsidiaries. Given these factors, we believe that the amount of outside additional capital necessary to execute our business plan on the low end (assuming target company sellers accept a significant portion of the purchase price in the form of seller notes or our equity or equity in one of our subsidiaries) ranges between $5 million to $10 million. If, and to the extent, that sellers are unwilling to accept a significant portion of the purchase price in seller notes and equity, then the cash required to execute our business plan could be as much as $10 million. We intend to raise capital for additional acquisitions primarily through equity and debt financings. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. There is no guarantee that we will be able to acquire additional businesses under the terms outlined above. The financial statements were prepared on a going concern basis and do not include any adjustment with respect to these uncertainties. Our ability to continue as a going concern and the appropriateness of using the going concern basis is dependent upon, among other things, additional cash infusions. We have prospective investors and believe the raising of capital will allow us to fund our cash flow shortfalls and pursue new acquisitions. There can be no assurance that we will be able to obtain sufficient capital from debt or equity transactions or from operations in the necessary time frame or on terms acceptable to us. Should we be unable to raise sufficient funds, we may be required to curtail our operating plans. In addition, increases in expenses may require cost reductions. No assurance can be given that we will be able to operate profitably on a consistent basis, or at all, in the future. Should we not be able to raise sufficient funds, it may cause cessation of operations. Summary of Cash Flow The following table provides detailed information about our net cash flow for the three months ended March 31, 2026 and 2025. Three Months Ended March 31, 2026 2025 (Restated) Net cash used in operating activities $ (16,730 ) $ (491,420 ) Net cash provided by financing activities 381,702 299,993 Net change in cash 364,972 (191,427 ) Cash at beginning of period 318,535 1,188,185 Cash at end of period $ 683,507 $ 996,758 39 Our net cash used in operating activities from continuing operations was $16,730 for the three months ended March 31, 2026, as compared to $491,420 for the three months ended March 31, 2025. The primary drivers of our net cash used in operating activities for the three months ended March 31, 2026 are our net loss of $3,092,074 and an increase of $819,945 in accounts receivable, offset by an increase of $1,955,970 in interest expense from the line of credit, the loss on issuance or change in value of the derivative liability of $668,821, stock compensation expense or shares issued for services rendered of $664,196, and increase of $224,261 in accounts payable and other accrued expenses, and an increase in accrued related parties compensation expense of $410,629. For the three months ended March 31, 2025, the primary drivers of our net cash used in operating activities was our net loss of $450,777 and an increase of $1,680,291 in accounts receivable, offset by increases of $1,137,308 in interest expense from the line of credit, $230,608 in accounts payable and other accrued expenses and $101,773 in accrued interest. We monitor outstanding patient cases as they develop through ongoing discussions with attorneys, doctors and our third-party medical billing company and additionally monitor our settlement realization rates over time. We currently have one primary method of accelerating our cash settlement of our revenue and related accounts receivable through accepting lower settlement amounts during the final negotiations of the settlement, which is coordinated through our third-party medical billing company. When our third-party medical billing company is provided with a settlement amount of 49% of gross charges or greater they will accept. When presented with a lower amount we will discuss the reasons for the reduced rate and negotiate a higher rate. Shortening our negotiation time frame will typically result in a lower settlement realization rate, but will accelerate the cash settlement of the outstanding accounts receivable. We began employing this method in 2024, which reduced our settlement realization rate as described below. We may employ this method in the future. The most recent average realization time for accounts receivable was approximately 12 to 24 months from the initial date of service. Typically, a patient will have a series of dates of service over an average of 12 to 16 months. We periodically evaluate our estimated settlement realization rate at which revenue is recorded in accordance with ASC 606. This includes a monthly review of historical data and settlement realization rates, along with estimates of current and pending settlements through ongoing discussions with attorneys, doctors and third-party medical billing company in order to determine the variable consideration under ASC 606 and the net transaction price. For the three months ended March 31, 2026 and 2025, we realized a 41% and 44% average settlement rate of its gross billed charges, respectively. We had no investing activities for the three months ended March 31, 2026 and 2025. Our net cash provided by financing activities was $381,702 for the three months ended March 31, 2026, as compared to $299,993 for the three months ended March 31, 2025. Net cash provided by financing activities for the three months ended March 31, 2026 consisted of proceeds from the issuance of convertible notes totaling $845,000, offset by net payments on the line of credit of $243,705, payments of debt issuance costs of $142,400, payment of note payable of $75,000 and repayments of the Small Business Administration loan described below of $2,193. Net cash provided by financing activities for the three months ended March 31, 2025 consisted of proceeds from line of credit of $427,186, offset by the payment of note payable of $75,000, payment of preferred stock dividends of $50,000 and repayments of the Small Business Administration loan described below of $2,193. Convertible Notes As of March 31, 2026, we had convertible debt outstanding, at carrying value, of $279,772. During the three months ended March 31, 2026, we received $702,600 in net proceeds from convertible notes and no interest was repaid. Debt discounts associated with the convertible debt at March 31, 2026 were $815,228. Please see Note 9 to the accompanying unaudited condensed consolidated financial statements for a description of the terms of our convertible debt. Promissory Note – Settlement Agreement In June 2024, we issued a settlement promissory note in the amount of $535,000 in connection with the cancellation of certain preferred stock and convertible notes. The note does not bear interest and requires fixed principal payments based on the timing and amount of capital raised in future offerings. During the three months ended March 31, 2026, we paid $75,000 toward the outstanding principal balance. At March 31, 2026 and December 31, 2025, the remaining principal balance was $35,000 and $110,000, respectively. 40 Debenture On March 12, 2009, we issued a debenture in the principal amount of $20,000. The debenture bore interest at 12% per year and matured on September 12, 2009. The balance of the debenture was $10,989 at March 31, 2026 and the accrued interest was $10,513. We assigned all our receivables from consumer activations of the rewards program as collateral on this debenture. Small Business Administration Loans On June 2, 2020, we obtained a loan from the Small Business Administration of $150,000 at an interest rate of 3.75% with a maturity date of June 2, 2050. The principal balance and accrued interest at March 31, 2026 was $142,690 and $0, respectively. Line of Credit We maintain a revolving purchase and security agreement with DML HC Series, LLC, or DML, which is accounted for as a secured borrowing. Under the facility, eligible accounts receivable are pledged as collateral, and advances of up to 70% of eligible receivables may be requested, subject to a maximum advance amount of $23,000,000. The related accounts receivable remain recorded as assets on our balance sheet, and the amounts drawn are recorded as a liability under ‘Line of Credit’ until repaid. We are required to repurchase or replace certain ineligible or uncollected receivables. Collections on pledged receivables are remitted directly to the lender and applied against outstanding borrowings. The revolving purchase and security agreement includes discounts recorded as interest expense on each funding and matures on September 28, 2028. As of March 31, 2026, we had an outstanding balance of $18,922,173 against the revolving receivable line of credit and accrued interest of $660,979. Related Party Loans On March 6, 2026, we entered into a lock-up and compensation resolution agreement with Daniel Thompson, our former Chairman of the Board and a significant stockholder, to resolve outstanding accrued compensation obligations. Under the agreement, we issued an unsecured promissory note in the principal amount of $116,667 bearing interest at 10% annually, payable interest-only in year one and 50% principal in each of years two and three, with all amounts due within three years. As of March 31, 2026, we had an outstanding balance of $116,667 on this note and accrued interest of $23,493. On December 21, 2025, in connection with bonuses earned by certain employees, we issued promissory notes in the aggregate principal amount of $1,085,703, in lieu of cash payment, including a promissory note in the principal amount of $460,000 to Alex Cunningham, our Chairman and Chief Executive Officer, a promissory note in the principal amount of $122,550 to Matthew T. Shafer, our Chief Financial Officer, and a promissory note in the principal amount of $460,000 to Daniel Thompson. These notes bear interest of 5% per annum and mature on June 30, 2026. As of March 31, 2026, we had an outstanding balance of $1,085,703 on these notes and accrued interest of $15,021. Contractual Obligations Our principal commitments consist mostly of obligations under the loans described above. Critical Accounting Policies The preparation of our unaudited condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. 41 For a description of the accounting policies that, in management’s opinion, involve the most significant application of judgment or involve complex estimation and which could, if different judgment or estimates were made, materially affect our reported financial position, results of operations, or cash flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” in the Form 10-K. Off Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable.